Bad bank to help state-owned lenders, capital outlay needs to be watched: Analysts

Creation of a special vehicle to house banks’ sour debts was welcomed by the industry on Monday as a move which will help state-owned lenders in conserving capital which has to be otherwise set aside as provisions.

However, at least one existing asset reconstruction company (ARC) opposed the move to create another ARC-Asset Management Company, with Arcil asking for the idea to be “avoided”.

Budget Banner

Amid calls for creation of a bad bank, Finance Minister Nirmala Sitharaman proposed the creation of the special vehicle to house the bad debt in the Union Budget announced earlier in the day.

An ARC and asset management company (AMC) would be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds and other potential investors for eventual value realization.

“New structure on stressed asset resolution in ARC + AMC framework will help clean up the balance sheets of PSBs faster and make future requirements of capital less onerous. However details on capital outlay for the company and other aspects are awaited,” analysts at India Ratings and Research said.

Peers at rival

said the proposed ARC could provide an additional avenue for stressed asset resolution by taking up the large assets while mid to smaller stressed assets may continue to be resolved by existing ARCs and resolution mechanisms.

However, Aswini Sahoo , the chief investment officer of Arcil, was not enthused and asked the idea to be “avoided” saying the ARC business in India has fully developed over the last 15 years.

“It might be time and cost saving to use the existing physical and intellectual infrastructure in aggregating and resolving the non performing loans (NPLs),” Sahoo said, pitching for capitalizing existing ARCs instead.

H K Pradhan, a professor at Jamshedpur’s Xavier School of Management said taking out bad debts from the books of the public sector banks and handing over to the ARCs is a “bold step” which will relieve the banks from provisioning for non-performing assets.

Dinesh Kumar Khara, the chairman for the largest lender SBI also welcomed the move.

Analysts at Icra Ratings said the proposed ARC/AMC will free up the bandwidth of management to focus on core lending operations, apart from improving reported financials.